What’s an individual investor to do to make sure that his wealth will not be completely wiped out in the coming financial Armageddon? Gold is the answer. Here’s why.
By Antal E. Fekete’s (www.professorfekete.com). The following are edited excerpts* from an address Fekete made to the CARA Bahamas Conference in Freeport, Grand Bahama that he sent to me for wider distribution:
Gold as the only form of capital that cannot be destroyed.
- In wartime capital destruction normally presents itself as physical destruction of plant, equipment, and products at various stages of production.
- In peacetime, capital destruction takes place on paper, through the consolidation of balance sheets. Take the simplest case when a bankrupt economic entity is overtaken by another in order to save whatever can be saved. Clearly, that part of the assets of the latter that have a counterpart in the liabilities of the former cannot be saved. It will be wiped out.
- It follows that no asset that also occurs as liability in the balance sheet of a counter-party is safe against destruction through consolidation ― even if that counter-party is the government. We must remember that every government experiment with irredeemable currency in history has been an abysmal failure.
In the extreme case, when the balance sheets of all economic entities are consolidated in a holocaust, and all paper assets are wiped out, gold is always a survivor: the only asset that cannot be destroyed through inflation, through deflation, or through any other malady of the monetary system. This means that gold, and only gold, qualifies as an instrument of hedging paper assets.
Given the above, every investor owes it to himself to make sure that his investments will not be completely wiped out in the coming financial Armageddon by providing an adequate level of insurance against risks that prey upon the value of paper investments i.e., physical gold held by the investor himself on his own premises.
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Trading Gold Makes No Sense
The attitude of most investors with regard to gold is faulty, not to say foolish. They keep talking about the “performance” of gold:
- they trade gold:
- they buy it when they expect the gold price to rise;
- they sell it when they expect the gold price to fall.
Many of them are finished with gold saying that “the bloom is off the roses”. This attitude is akin to that of the property-owner who thinks that he is saving money by cancelling his insurance coverage hoping to reinstate it later. It never occurs to him that it may not be possible to reinstate, if the external conditions change drastically.
The best policy concerning insurance is to buy it and “forget about it”. No regrets if the occasion to collect insurance compensation never arises. It is not a loss: it should be looked at as a gain.
A simple gold-accumulation plan, aiming at a gold hedge equivalent to 10-15% of net worth, with monthly additions will suffice, with the proviso that it is preferable to increase the hedge when the gold price is down.
Gold investors typically get nervous as they listen to rumors that the volatility in the price of gold indicates that the value of gold has become unstable. They forget that it is not gold that is unstable, but the dollar in which the gold price is quoted. Gold has been, is, and will be, the paragon of stability. Ultimately, the price at which you have purchased your hedges is unimportant.
Tips for Hedging
- Buy anonymously and don’t talk about it.
- Don’t worry that you can’t sell anonymously: you are not going to sell, just like you are not going to cancel your fire insurance policy as long as you own the house.
- Don’t worry about capital gains taxes on your gold that you hold as hedges against paper assets. Since you never sell, you never incur a tax liability…
- Those so-called profits on your gold hedges should never be considered as profits. They should be looked at as advances on payments of insurance compensation for anticipated losses. It would be foolish to take these “profits” and spend them. Those losses may disappear, together with the gold profits, creating the impression that your hedges don’t work. They do, but the results have to be interpreted correctly. Spending gold profits is tantamount to cancelling the insurance policy prematurely.
The big test is still ahead. The crisis is not over, not by a long shot.
[The above article is presented by Lorimer Wilson, editor of www.munKNEE.com and www.FinancialArticleSummariesToday.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]
*Original Source: http://www.munknee.com/fekete-gold-is-the-answer-to-economic-woes/
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